Megan McArdle comments on this article that appeared in the economy [link removed, here’s why] speaking about how Big Pharma is destroying Biotech by pushing all the risk onto venture funded companies and then stiffing them when it comes to the reward side for all that risk.

I work for a Biotech, so I will get my bias out there, but this is absolutely true. As long as Venture Capitalists were willing to keep sheltering the risk, there was no reason for the Big Pharma to do anything other than let them. But the party is over, and with Big Pharma shedding R&D capability quite readily, and Biotechs running out of venture funding, who is going to be left to find new treatments?

I have personally witnessed every one of these tactics highlighted in the article. I think part of the problem is the “one product biotech” model is fundamentally flawed and unworkable, because the odds of any single program succeeding through to an approved drug, and then being a market success, are very small. Big Pharma would be far better partnering with many different biotechs with novel approaches to different parts of the drug discovery problem, and then figuring out what works and what doesn’t. They should be looking for innovation, and not necessarily programs. You can decide what innovation is worthwhile by what programs can be developed out of them.

Big Pharma is mostly good at regulatory compliance and marketing, and not so good at innovation. Biotechs are better at innovation, but don’t have the capital to do regulatory compliance or marketing. In order for this model to work, Big Pharma has to be willing to share risk and reward with investors. Until they figure that out, the industry is going to continue its downward spiral, and sadly, that’s going to mean fewer new treatments hitting the marketplace over the next decade.

P.S. – If any of my readers are venture capitalists with some money to spend on a Biotech with an innovative approach to drug discovery, let me know in the comments :)

9 Responses to “Biotech Industry Talk”

Interesting, but coming from the computer sorts of things part of the startup community I have to say that there’s a lot of wisdom in this snarky comment, echoed in more detail by others, to the original article:

Pasteur
2/17/11 8:21 pm

he makes very good points, but the irony of a VC complaining about being bullied by someone with cash (pharma) should not be lost on many entrepreneurs.

There are also a few … questionable assertions like Hambrecht & Quist being a investment bank that biotech made; maybe true, especially since I’ve only focused on their computer stuff work, but I wonder….

If the returns on biotech investments are too low, then of course capital will disappear. Kinsella pleads for self-interested enlightenment on the part of big pharma biz dev teams to solve this problem – that’s wishful (and futile) thinking. Either big pharma will start paying more for acquisitions as the number of opportunities drops, or (much more ominously) they may lobby for more government intervention and funding of the drug development process.

Kinsella and others at the front lines should be speaking about the core issues and not pleading for minor rule-changes “inside baseball.”

Having worked on both sides of Biotech VC, I agree with Glen — there’s nothing inherently flawed in the “one product biotech” model; at least, not from the diversified VC or Pharma perspective. As the bumper sticker says: VCs are Preferred; Founders are Common.

As long as VCs are OK with a decade or longer period of time before there’s a possibility of return, that’s fine. But in my experience from the other side, they aren’t… and the odds are they are going to lose their money.

The current industry paradigm for discovering drugs is really not working given that many of the targets remaining are difficult. It would seem to me without further innovation in this area, betting on a single product is going to continue to be a long odds crap shoot.

As noted, I look at this from the “computer stuff” side of things, and what I see is that conventional VC as we knew it had a great run from sometime in the ’50s (I normally use the founding of DEC as a marker but it’s a bit more complicated) to SARBOX which seems to have finished shutting the IPO window for all but the most exceptional ventures.

This is a a really big problem, much bigger than just biotech, and addressing the root cause would be a very good idea, at least if we’d like to see a return to the more dynamic economy we enjoyed in that 4 decade period.

Hmmm, I have to wonder how much of Tyler Cowen’s The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better is due to this problem (since it’s stuck in the Kindle ecosystem (spit) I haven’t read it).